Kaplan University School of Professional and Continuing Education Kaplan University School of Professional and Continuing Education

RealXperts: Be Your Own Bank - Leveraging Your Retirement Funds in Real Estate

RealXperts Career Video SeriesJoin instructor Josh Manier for this dive into how you and your clients can leverage under-performing retirement funds by investing in real estate, something you already know! You'll learn how savvy real estate investors legally access and maximize their own retirement funds through self-directed Independent Retirement Accounts.


Hello and thank you so much for joining us today for today's Kaplan's University's KapXperts program. My name is Josh Manier. I have been working with Kaplan University for the past five years, teaching mortgage and real estate, continuing education. I'm happy to be a presenter here today for the time that we have. Our topic will be, Be Your Own Bank: Leveraging Your Retirement Funds in Real Estate.

A little background on myself, I have worked for the past seven years, primarily helping clients set up self-directed retirement accounts, as well as alternative investments related to real estate within those accounts. Today's topic, we'll be talking about how real estate agents, investors and landlords can potentially benefit from utilizing these accounts.

So as opposed to investing in Wall Street back-type investments, you can use your own expertise, knowing what you do best in investment real estate and utilizing that knowledge and experience to leverage your retirement account dollars to make them last and go further than you may otherwise be able to do with a traditional type retirement account. Now let's go ahead and get started in our presentation.

Opportunity for real estate agents. For real estate agents, when we speak of utilizing self-directed retirement accounts, it's important to define what these accounts are first and foremost. With traditional retirement accounts, we have stocks bonds and mutual funds in the host and variety of different providers that offer those investments. With the self-directed account, it is still a retirement account in every sense of the word with the exception of alternative investments such as real estate can be purchased within that account. So we're transferring money from the traditional account to the self-directed account for the purpose of holding and owning titled real estate within that investment portfolio, within the retirement account.

So for real estate agents, here are a few ways you can benefit your clients. Expanding the value that you bring to your clients. When is the last time you reached out to a long-time friend or client that you've worked with in the past, with a new and unique way for them to be able to potentially benefit, not only their investment portfolio but actually their retirement account. So you could expand the value that you bring to your clients by informing them of this useful strategy. You can provide your clients an alternative to the volatility of Wall Street.

It's true, we've all experienced in the last eight years, with the decline of the stock market and then the rise of it again, that's meant for many people that they've had to work longer or put off plans for retirement. The volatility associated with Wall Street is not present in the same manner or respect as it is with your investing in real estate because real estate, it creates an income stream whereby which as long as that income stream is sufficient for your retirement needs, you have more time on your side potentially, before you necessarily have to sell the real estate within the account.

Thirdly, you can tap into the nearly $20 trillion available in real estate, in retirement account investments and only 2% of this $20 trillion is at work in self-directed retirement accounts. You may be a real estate agent, you're listening in and you hear me, you say, "Well, what is this mean for me?" Well, there are millions of dollars in your clients retirement accounts that could [audio skips 00:03:29] and you could walk them through the process of how that may be possible and how it could be a good fit for securing their financial future. The bottom line as an agent, you can use these accounts to help you, yourself, your family and your clients, sell more real estate.

For real estate investors or landlords, you may be tuning in and you're thinking, "I've heard of self-directed accounts or maybe I don't know exactly how they were. What are some ways that I could utilize that?" Well, you could leverage your experience of being a property manager or an owner of numerous investment properties, to diversify your retirement portfolio outside of the volatility of Wall Street. So you could invest in something which you're familiar in, and be able to potentially grow your retirement account outside of a traditional retirement account needs. You can grow your portfolio in a tax-deferred or tax-free account, meaning all the rental income, all the gains from the property sales, all are tax-deferred or tax-free back into that retirement account.

Third and foremost which is a very practical implication. You have the advantage of closing quickly for cash, if you have enough money in your retirement account, to purchase a property outright. Getting back to real estate agents in the slide just a moment ago, if you're a real estate agent and you have someone that has a retirement account and they're a cash buyer, because they have all the funds in their retirement account, now you have more leverage to purchase a property. You can close quicker and presumably, you can get a better price and a better [audio skips 00:05:01] positioned to take advantage of opportunistic real estate investment opportunities.

Fourthly, as a real estate investor, you have the ability to invest in other real estate investments such as REITS, private mortgage notes, private mortgage [audio skips 00:05:16] perhaps on larger commercial investment property type transactions.

Okay. So we talked about how this can benefit you, how your experience can be utilized to maximize your retirement account. Let's take a look now at the definition of what these self-directed accounts actually entail. The beneficiary of the account is responsible to make the investment decision. This differs from stocks bonds and traditional accounts whereby in investment adviser is typically assisting you as the client, in where to allocate those moneys.

You as a self-directed retirement account holder are responsible for the due diligence and the decision making which you can utilize your expertise, to be able to invest in real estate. What makes a self-directed account unique is the variety of the alternative investments afforded to you. With traditional stocks bonds, mutual funds with annuities, they do not have the option to invest in real estate or any of these all other alternative type investments.

The IRS permits a traditional retirement account to be converted to a self-directed account. The only restriction would be on, if it's an employer type plan. So a 401k at a employer that you're actively an employee for, this would be a restriction where the employer's 401k plan may allow for what's called an In-Service Distribution, where a portion of your funds can be transferred over to a self-directed account.

However, that ability is at the discretion of the employer's 401k plan. However, if you have a previous 401k from a former job, or you have an IRA, or if you are self-employed, any of those categories, you can setup a self-directed retirement account for yourself and for the benefit of those that you're working with as clients.

Let's talk now about account types. Remember a few moments ago I said, the self-directed account, the only reason or difference between the accounts is how you hold the title. So the self-directed account, you can hold alternative investments. In traditional account, you can hold traditional stock bonds, mutual funds. They are both retirement accounts in every sense of the word.

So when we're looking on our screen and seeing traditional IRA 401k, Roth IRA 401k, the SEP plans or the Simple IRAs, keep in mind that the retirement accounts are all the same, as far as the IRS rules of how much money you can put it per year, when you take the money out, whether it's taxable, if you take it out before your retirement age, the penalty, all the other rules and provisions that the IRS has written, in regards to these retirement plans, are exactly the same for the specific account types that are listed.

For our purposes as investors and real estate agents, we need to utilize a self-directed account for the purpose of actually taking title to the real estate within our retirement account. So that's the primary purpose of that, related to these different types of accounts.

Let's go now and take an overview of the history of self-directed accounts. Maybe tuning in here today and you're thinking to yourself, "Hmm, I've never heard that you can buy real estate in your account." Or you might be thinking, "Do I have to take a distribution for my account and pay tax on that money to buy a piece of real estate?" The answer is no. It is simply an account to account transfer. Simply, be similar if you opened up another IRA account at a different traditional investment provider. Okay? You're transferring from one account, one IRA account to another IRA account, it's not taxable if you're just transferring to different accounts.

For our purposes, we're transferring to the self-directed account so that we can purchase real estate. And this has been around since 1975 as part of the Employee Retirement Income Security Act of '74. At that time, businesses would be putting money aside for their employees, specifically for retirement benefits. The congress in '74 worked on this. And in '75, they formalized ERISA which allow for the self-directed plans. So the plans that we're talking about, have been in existence for three years. And currently, there are over a million self-directed retirement account holders across the country.

You may be wondering, "Well, why have I not heard of this?" Financial advisers, large brokerage houses, and those that sold traditional type investments don't offer this. The information's simply not made widely known or available because they don't offer that as an investment alternative for their retirement accounts. This represents a little less than 2% of the $20 trillion of retirement account dollars that are in the retirement account market today.

So for real estate agents or investors, when you're thinking about, as a real estate agent, how to close more sales. Okay? Those dollars for investment properties, may be in your retirement account, my retirement account, your client's retirement account, and are made available for the self-directed account, for them to potentially purchase real estate.

On another interesting note, it's important to see that roughly half, which is approximately $200 billion, in retirement account dollars are invested in some form or fashion of real estate. Real estate is a tangible asset class that many people are familiar with how to make money with real estate. Maybe they are familiar with the area or the way in which a property can be rented or income can be generated. Thus, that has the largest percentage of investment for self-directed accounts.

Thousands of accounts are opened up each month through various self-directed custodians and facilitators. Facilitators set up business plans like a 401k plan for sole proprietors. Whereas a custodian is simply a custodian for a self-directed type IRA. So that's the difference in the nomenclature there that you see in your screen.

Typically, self-directed account holders are entrepreneurially minded, perhaps they own a small business, but they are hands-on investors. Like many of you tuning in today, that you want to use your expertise and experience for your own benefit to grow your retirement account for real estate, and it's outside the volatility, the ups and downs of Wall Street.

Okay, let's take a look now at the alternative investments that are allowed. So real estate, we have at the top, which is obviously 50% of the total self-directed accounts invest in some form or fashion of real estate. There are other investments. However, they are not as common. In many cases, may carry more risks or uncertainty or just not as much information about, in a general sense. So we have notes, private company stock, precious metals like gold or silver bullion, tax lien certificates, oil and gas, commodities, foreign exchange currencies, and then other investment types, specifically not disallowed by the IRS. So these provide a lot of latitude.

Now when we're talking about traditional IRAs and 401(k)s, what we're referring to is contributions with pretax dollars. Meaning, if you have a 401k and you're making a contribution, you actually get a reduction in your taxable income. And that's reflected on your W-2 statement. If you are making an IRA contribution, a traditional IRA contribution, you get it right off on the first page of your tax return. So if you get a tax benefit today, the money goes into the retirement account. And then the gains on that retirement account, upon retirement, are taxable when you take out the monies. So that is a traditional IRA or 401k.

You get a tax benefit today, but the money and the gains are taxable upon retirement. That is in contrast to the Roth IRA and 401k, where it's made with post-tax dollars. So there is no tax benefit today, however with post-tax dollars, we can contribute to the Roth account. All the gains of those accounts can go tax-free until the time of retirement age. So those are the compare and contrasts of the two main types of retirement accounts that clients are working with as it pertains to self-directed type plans.

For all the wonderful features of the self-directed account, and they are vast in the uses and the creativity, you can employ with these accounts are many. There are some limitations as far as the uses in the applications of the accounts. So here, we have listed IRS Code 4975, IRS Publication 4975, regarding disqualified persons. So a disqualified person would constitute yourself as a beneficiary of the account, your spouse, any direct relation of family. So kids, grandkids, great grandkids, parents, grandparents, great grandparents, fiduciaries of the plan, investment managers or any company that you own 50% or greater ownership interest in, could not basically work or do something on behalf of the investment.

For example, you may have a retirement account and have your child going to college, your IRA cannot purchase an investment property and have your child rent the property from your IRA. Okay? Because your child is a prohibited person, in relation to your IRA account. You can't buy a vacation rental property then actually with your IRA, and then actually live in that property. That would be a violation. So the basic rule of thumb is you can't have any buying or selling to or from your IRA, or any leasing of the property to or from your IRA or any of the disqualified persons that are listed.

Interesting to note, that point there on your screen says, "According to 4975 of the IRS Publication, siblings, aunts, uncles, cousins and friends are not included in the definition of disqualified parties. So it's only direct immediate family members. You might be thinking and saying, "Well, I wonder why the IRS has that as the case." Here's the rationale. Anything that could hinder the investment, growing as much as possible in that tax-deferred account, the IRS wants to make sure that that does not take place. So even if you were to have the property in your IRA and rent it to your child or something at a market rent, the IRS just says, "There can't be any [inaudible 00:15:21] conflict of interest." That's a little bit of logic behind those disqualified persons.

Along those lines, prohibited transactions are the investment types not allowed. And those would include life insurance, collectibles and private stock in an S corporation. The reason for private stock in an S corporation is that it's taxable income to all the shareholders. Of course, if we own a retirement account as a portion of that, retirement accounts, of course, are tax-deferred and then that be subject to ordinary income tax. So that's the reason for that last [audio skips 00:15:54] there on the slide.

For real estate agents, you've listened to the presentation today, you might be thinking, "Hmm, this sounds interesting. How could I use this practically in my business?" Well, that's a great question and I'm glad you asked. Perhaps you have a buyer and a seller [audio skips 00:16:12] that have agreed on a price, and the buyer is purchasing an investment property. And the bank initially tells your buyer that they need 20% down on the property, and all of a sudden, they go through the process. The property is under contract for an agreed to price, and the bank says, "No, we need 40% cash down." And the buyer either does not have that much money or they're unwilling to put that additional down payment down.

You, as the buyer's agent or the listing agent, now have the ability to pull the tool of the self-direct retirement account out of your tool belt and say, "Wait a minute. The buyer and seller have agreed on a price. Mr. and Mrs. Buyer, do either of you have a retirement account that you may be open to or willing to purchase this property with it?" All of a sudden, you, as a real estate agent, look like a hero because you brought out this unique strategy that's not very well known. Your buyer and seller had agreed on a price, and you, by yourself, have allowed them to get to the finish line of that real estate transaction that was otherwise, basically a dead deal.

Working with just a handful of self-directed investor clients may result in multiple transactions. This is the other really cool feature about this program. You, as a real estate agent, even if you're working with a handful of investor clients, that they're buying property in their self-directed account, they're owning it. A few years, they're reselling it. All the gains are tax-deferred back in the account. Unlike when you sell a normal investment property, you're paying a long-term capital gains tax, so there's simply less profit there to put into the next property. With the self-directed account, all the rent and all the profit goes back into the account, and you were their trusted agent, you're there to be able to help redeploy those dollars into additional real estate purchases.

In addition to that, maybe you're doing property management or tenant placement. If you're doing those services in addition to this, even with just a handful of clients, buying and selling properties, this could be a very lucrative business, just side business for what you're already doing, and a very big value add to your clients that may not even be aware that this is a possibility for them to be able to have as an investment for their retirement.

Investors and landlords. You're tuning in and you're thinking through how this could work for you. Well, it could be a means to free up capital that you could use yourself in or with partners, to buy additional real estate. It could be something too, where maybe you have a good amount of real estate holdings. You don't necessarily want or need more real estate on the personal side, but you may have retirement dollars that you could employ in something, in a project that may have very long-term upside and appreciation potential. Now you have a vehicle to have a liquidity to do that in the retirement account, but also shield all the gains from being taxed at the moment, and have that value grow in a very exponential type way.

As Baby Boomers near retirement, they're moving from more of an asset accumulation phase to an income allocation phase. When I say that, what I mean by that is as people go in their late 40s and 50s and they near retirement, hitting home runs and getting double-digit return is not as much of the focus. The focus shifts more to, "I've made this amount of money, how do I keep that amount of money and have an income stream that's not subject to the ups and downs of Wall Street?" So real estate investment very well may be that tool.

For example, if someone has a half a million dollar retirement account and they buy three different investment properties, and those investment properties yield $35,000 per year net, on the rental income after expenses. The IRA holder may be in retirement, they could draw out that 35,000 of rental income, provided that property is rented, they could own that property in perpetuity and simply draw out that retirement income. So what better way to ensure your retirement by doing something that you know best, that you're experienced in, and that you see you could potentially create a perpetual income stream in your retirement because you have complete discretion and control over it.

To wrap up here, the course overview is the 4-hour CE course that's written by Kaplan that I teach, both here in Colorado and in Minnesota. And it goes over and flushes out the following topics on the self-directed program. Various account types, how to setup an account. Okay, I've heard about self-directed accounts, what's the process to transfer the money? What are some considerations, for myself as a real estate agent or an investor, of how to walk through that process? How do I write up the purchase agreement in the property? How do I go to close it? What is that process look like? How do I hold the title to the property? Tax and IRS considerations, we'll flush that out in additional detail in the course.

How to obtain non-recourse mortgage financing on properties owned within the account? For those of you that may not know, you can actually obtain financing on a non-recourse basis. Meaning, your IRA can purchase a property and typically borrow up to 60% of the cost of that property in the form of a non-recourse loan.

For many investors I had worked with, they have employed the strategy and ultimately, they have owned rather than owning four properties in their IRA with cash, they've owned eight properties in their IRA by borrowing against them, and then they pay them off in retirement, by time they go to retirement. So the results of that strategy with a non-recourse loan is we don't have four properties, now we have eight properties owned within a retirement account. We don't have $4,000 of net rental income, now we have $8,000 of net rental income.

Coming back to our retirement account. And now we're in retirement, our loans have been paid off, and now we're taking that money out each month, and we're living on retirement. So we never necessarily have to liquidate the properties, we've created our own income stream, and we've secured our own retirement through our knowledge and experience.

We'll also talk about the various real estate investment strategies, similar to the one I just mentioned. And then finally, we'll talk about marketing strategies for real estate agents to promote the self-directed accounts to the clients and those that you've worked with.

Now that concludes this portion of the presentation. We're going to go ahead and turn, and do some question and answers for the time that we have remaining.

So let's go ahead and take a look here at some of these questions. Okay, the first question. "How much money should I have in my self-directed account before I make my first investment property purchase?" Well, that's a great question. It really depends on what is the purchase price or the value of properties that you're buying. We're broadcasting here out of the Twin Cities, Minneapolis-Saint Paul. That number may be 50,000 to 100,000.

I would say minimum, even if you're going to obtain a non-recourse loan, based upon buying a property in the metro area. You may be living in a property or an area where the cost of living is lower, that number very well could be less. But I would say in general, 50,000 is kind of a good minimum number for most of the folks that I've worked with. All right, let's take another question.

"Is there an ideal age I should be when I make investment property purchases?" So I've heard about the self-directed, when should I employ the strategy? My answer is gang, it really depends on what you're trying to achieve with your account. Traditional investment advice is the younger you are, the more risk you can potentially take with equities and stocks, to try to grow the value of the account. And then as you're in your middle age and you're closing in on retirement, try to do less risky investments. But it really depends upon what you're trying to achieve and accomplish, as to when would be a good time, as well as how much you have in your account, to actually be able to purchase real estate.

Excellent questions, gang. Let's take another look at another one here. Oh, this is a really good question. And this is actually the question I'm asked very often in the course that I teach here at Kaplan. "What happens when I take my mandatory distributions?" For those of you that may not be aware, this is referred to as the Required Minimum Distribution, or RMD for short. And what this is, is this is at the age of 70 and a half, you are required by the IRS to take out from your retirement account in minimum amount per year, based upon three different formulas that the IRS has.

So one of the three formulas you talk with your CPA or tax person, they tell you what that would be for the required minimum distribution, you have to take that money out each year, and you have a 1099, you pay tax on that money that you earn or that you take out of your account in that year. What happens with the self-directed account, whether you own real estate, that's income producing, you have to take out that value from the account. Hopefully, you have cash in the account either from rental income or other investments, you can take out that minimum distribution.

But that would be a planning function that you or your client, if you're over 70 and a half or you're nearing 70 and a half, you'd want to have that conversation with your tax advisor and or with your person that's handling your investments or your real estate, to ensure that you have enough liquidity on hand in the retirement account to make that annual required minimum distribution. So that's an excellent question and a very important one, that is often asked and is important to consider when we're talking about these types of accounts.

Okay, here's another question. "I am a hard money lender. Can you use the money from the self-directed account to lend it to investors that are flipping homes?" All right. So a hard money lender, for those of you that may not be aware, hard money lending is lending on property where it's a first mortgage placed on investment type property or commercial properties at a fraction of the value. So typically, 70% or less of the property's value, there's a first mortgage put on. And then the hard money lender, private lender is typically lending an interest rate above what the extra charge is.

The answer is you can use self-directed accounts to do hard money lending or private lending. You can sell properties like contract for deed or land contract or simply private commercial or investment type mortgages. In fact, that's actually one of the investment types that was listed out in the previous slide. It would be an example of a secured promissory note that was listed in the slides a little earlier.

Okay. All right. Let's take a couple more. Looks like we have time for a couple more. "I used a self-directed account to buy a home and I'm not retirement age. Can I keep the monthly rental income in my personal checking account to live on or must it go back into the self-directed retirement account?" Here's a question, that's a great question, and it's one of clarification. First and foremost, when we're talking about purchasing in the retirement account, the good way to think about this is this kind of like a trust account. So the IRA is over here, we have $200,000. That retirement account that has 200,000 in cash, it purchases a property, takes title to that property and all the rental income must go back to the retirement account. Back to that self-directed IRA. Okay?

Property expenses, taxes and insurance are paid out from that account. And then you, that had asked the question, how do I get money from that account? You would request a distribution on either a monthly basis or quarterly or annually, however you want it. But you would take a distribution from that retirement account at an IRA. Let's say, if that net rental income that's builds up over the quarter of the year, you take that distribution and then that would be the amount you paid tax on. Okay, so no rental money from the self-directed account.

Property? None of that should ever flow through your personal checking account, unless you're actually taking a distribution. And then just be aware that you are responsible for the taxes and would be owed on that and the reporting requirements and so forth. So that would be something. If you're doing this, you want to have a good accountant or CPA by your side. So that's an excellent question. So making sure that there is that separation there between the retirement account and your personal account, unless you are taking a distribution.

I think we have time for one more question, and then we'll go ahead and wrap up here for today. Let's take a look at the next question. "When can you start drawing from the net rental income?" Well, remember how we talked about the IRS rules are exactly the same for traditional or self-directed accounts. So you can technically draw from the retirement account at any point you'd like.

However, if you're not 59 and a half years old, you would incur the 10% penalty. Okay? Unless it's an emergency or something that you would have to take out the money, prior to retirement, it's typically best to leave it until it's 59 and a half. But there's technically no rule on when you could draw the rental income. If you're not 59 and a half, you'd be subject to that penalty, as well as the tax that is owed.

So that is all the time that we have for today. I do appreciate your questions. Thank you so much for attending KapXperts here today. Again, my name is Josh Manier. I'd be happy to be a resource for you. If you'd like to contact me, if you'd like to check out the article that's posted below that provides some additional information as well, if you'd like to join us at one of the upcoming classes here in Minnesota or Colorado, feel free to reach out to Kaplan and you can join the continuing education course. We thank you so much for attending. We hope that this has been very helpful and beneficial. And we look forward to seeing you soon. Have a great day.